The burden of student loan debt is preventing potential home buyers from starting households, which in turn is hindering overall economic growth, according to Consumer Financial Protection Bureau (CFPB) director Richard Cordray in remarks made on September 23.

“I believe we are standing at a precipice when it comes to student loan debt in this country,” Cordray said. “That load has reached $1.2 trillion, second only to mortgages as a category of consumer finance. This burden is growing fast and the issues that flow from it are central to public policy in America.”

The rising cost of tuition is causing higher student loan debt, which is in turn causing more borrowers to default. Cordray said CFPB estimates that more than seven million Americans are in default on more than $100 billion in student loan balances. For those who default at a young age, the black mark on their credit report may prevent them from buying a home – and might even keep them from getting a job, Cordray said.

“The domino effect of student loan debt is real, and it is spreading,” Cordray said. “It is hard to erase this debt quickly – paying it back may take many long years and prevent people from achieving other financial milestones.”

Thought leaders in the industry have long believed that reform is necessary in order to reduce skyrocketing student loan debt and free up the finances of would-be homebuyers.

“If we are truly committed to promoting homeownership for generations to come, it is time to address the more than $1.2 trillion of federal student loan debt that is crippling the finances of future homebuyers and keeping them from experiencing the promise of homeownership,” Five Star Institute President and CEO Ed Delgado said last week in his remarks to industry leaders at the 2014 Five Star Conference and Expo. “If Washington wants to make a real difference for the future of our children – we must reform student education financing.”

Cordray stated that young people are not forming new households at the same rate as they used to, and the decrease in household formation is preventing economic growth. Increased student debt is causing millennials to live with their parents until a later age, or to share living arrangements with peers.

“The homeownership rate for young people peaked before the financial crisis and by the first quarter of this year was down more than 15 percent,” Cordray said. “This is very troubling because most first-time homeowners are young people who drive the market for home purchases.”

The effects of heavy student debt are not felt in just the housing sector, Cordray said.

“Student debt burdens can get in the way of young people buying a car, starting a small business, or saving for retirement,” Cordray said. “We are deeply concerned about how debt influences career choices by acting as a barrier to public service for a rising share of student loan borrowers.”

Tools are available now to assist consumers with managing their student loan debt, Cordray said. CFPB has partnered with the Department of Education to develop a set of online tools known as “Paying for College,” which helps better educate students and their families as to what their financing options are when deciding how to cover educational costs. CFPB also offers answers to common questions it is asked regarding consumer finances (including student loans) in a feature known as “Ask CFPB.” Notably, Cordray said, CFPB now handles individual consumer complaints regarding student loans. Also, many who work in public service positions are eligible for student loan forgiveness, which “can enhance the affordability of public service careers,” Cordray said.

Cordray announced that two organizations, AmeriCorps and the Peace Corps, are both signing the pledge to help consumers handle student debt. CFPB includes employees who are alumni of both organizations.

“They are pledging to talk to employees about their options for student loan forgiveness, verify that they work for a public service organization, and check in with them annually to make sure they stay on track,” Cordray said. “We have also created toolkits for employers and employees to help them understand how to take advantage of these benefits. We want everyone eligible to be signing up for the loan forgiveness that federal law provides, which they are earning by virtue of their public service work. These are great first steps toward that objective.”

Tens of thousands of San Diego County homeowners continue to owe more on their properties than they are worth, despite the run-up in prices that has taken place over the last two years.

In the second quarter of this year, there were 46,585 county homeowners underwater on their homes, real-estate tracker Zillow reported this week. Those with negative equity make up about 10 percent of property owners in the county who have a mortgage, down from 21 percent in the second quarter of last year.

The homeowners were underwater despite an increase in the county’s median home price of more than $100,000 over the last two years.

“There were a lot of people that got caught at the top (of the housing bubble),” said Mark Goldman, a loan officer and real-estate lecturer at San Diego State University. “During the run-up, people were just out at a frenetic frenzy in 2006 and 2007. They didn’t care what price they paid for property.”

Negative equity in the county peaked at 35.6 percent of homeowners in the first quarter of 2012, but it appears those remaining underwater bought in areas with new construction completed just before the housing crash. Most of the negative equity in the county is in Chula Vista, Oceanside, San Marcos, Spring Valley and El Cajon.

As a whole, San Diegans who are underwater collectively owe $6.14 billion. That amount, however, should continue to decrease as San Diego home values rise, and people regain equity in their properties.

For example, in June, the median sale price in the county was $450,000, up 8 percent from June 2013, and 34 percent from the median in June 2012. Still, that’s a long way from the peak median of $517,500 in November 2005, according to CoreLogic DataQuick.

Zillow predicted that by the second quarter of next year, the percentage of homeowners underwater will decline to 7.6 percent in San Diego County.

“We knew it was going to take a long time to correct,” Goldman said. “There’s always going to be properties that are upside down. Is this more than normal? Yes, but we’re returning to a more stable market, and there will be people who just simply have paid too much for their property.”

Christopher Thornberg, founder of Beacon Economics of Los Angeles, said the move-up market will get a drastically needed boost as people regain equity in their homes.

“More of that equity means that people are going to have better access to capital, they’re going to have more money to put down on other properties,” he said. “The move-up buyer is the kind of buyer that drives new home construction.”

Nationwide, 17 percent of homeowners, or 8.7 million, were underwater in this year’s second quarter. Of the nation’s 35 largest metropolitan areas, San Jose had the lowest percentage of property owners underwater on their homes, with 4.6 percent, while Atlanta had the highest at 28.9 percent.